Recently, while preparing a financial plan for a client, I came across a situation that seemed to be a case of “The Man” sticking it to a worker. The worker, in this case a highly compensated one, appeared to have been shortchanged by about $3,750 on promised compensation from his employer. Potential headline news on MSNBC, or at least our local channels, right?
Maybe. However, a little further investigation revealed that instead of a greedy corporation cheating a worker out of what he had fairly earned, there was a far less sinister explanation.
In fact, this particular issue only impacts highly compensated workers that can afford to save significant portions of their income, so it probably wouldn’t have made headlines anyway. (Well maybe CNBC.) Nonetheless, for those fortunate enough to earn higher than average income, it is still probably worth reading the rest of the story.
In this case, the client (we’ll call him Greg) was contributing to his company’s 401(k) retirement plan. Greg receives a high annual salary but for an easier illustration, I am going to say he has a taxable income of $180,000 to per year which is paid in $15,000 monthly paychecks. For the past few years, he had opted to save 20% of his salary, about $3,000 per pay period, into the plan. At that savings rate, he reached the 2020 maximum pre-tax salary deferral of $19,500 into his 401(k) in July.
According to Greg, his employer supposedly matches his contributions “dollar-for-dollar” at 5%, which should have been another $9,000 contributed to his plan for 2020 (for a total of $28,500). However, in reviewing his paystub, the company contribution for the year was only for $5250. What happened to the other $3,750?
“The company will match your 401(k) contributions dollar-for-dollar, up to the first 5% of your Eligible Compensation, each payroll period.”
First I asked Greg if he had any literature from his company that discussed the 401(k). He went on the plan website and downloaded his 401(k) Plan Summary Description and sent it to me. In the matching contributions section it read, “The company will match your 401(k) contributions dollar-for-dollar, up to the first 5% of your Eligible Compensation, each payroll period (emphasis added).”
Aha!
In other words, instead of continuing to make matching contributions of 5% of Greg’s compensation for the whole year, his employer only made the dollar-for-dollar matches in the payroll periods that Greg contributed to the plan. Greg contributed $3,000 per month during January through June, then another $1500 in July to reach his salary deferral maximum of $19,500. After that point, he had no more “Eligible Compensation” in the remaining payroll periods during the year. Thus, there were no additional company matching contributions after that point.
How to Get the Most Out of Your Company Match
Unfortunately, Greg couldn’t do anything about the missed company matching contributions from previous years. However, the solution for Greg to receive the match going forward was fairly straightforward. The simplest fix would be for the employer to amend their plan to avoid the problem altogether. That would mean they either do a lump sum match at the end of the year or some sort of “true-up” for those participants that maxed out their contributions before year end. However, that is likely to be easier said than done. But a little arithmetic was all it took to ensure that Greg will receive all that he has coming to him in the future.
If you are a highly compensated employee, here are the steps to determine if you are leaving any matching money on the table:
Get a copy of your year-end retirement plan statement or paystub.
Divide the amount your company shows as matching contributions by your taxable wages.
If the amount isn’t the percentage you were expecting, review your retirement plan’s Summary Plan Description to understand how the match is determined.
If you see language that suggests it is made per payroll period, you may need to adjust your deferral percentage to insure you don’t maximize your contributions until the final payroll period of the year.
Calculate your optimal deferral percentage by dividing the maximum allowed contribution by your taxable income.
For Greg, the solution was to lower the percentage of his salary that he was deferring into his pre-tax 401(k). I calculated the maximum allowed contribution for 2021 ($19,500) by his annual taxable income ($180,000) to arrive at a deferral percentage of 10.83%. That lowers his monthly contribution to @ $1625, spreading his contributions over all of the payroll periods during the year. His company match will then be $750 per month for the entire year, totaling $9,000.
If you find that you are in a similar situation to Greg, you will want make adjustments to your contributions before you reach the maximum for the year. If you have already contributed to your plan or if you receive income in different amounts each month, you likely will need to adjust your contribution each year. Otherwise, you may be leaving money on the table!
This was an issue we uncovered for Greg during the process of doing his financial plan. If you don’t have a plan or would like to review yours, get in touch.